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2020 (5) TMI 310
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....nd secondly for ay: 2009-10 dated 15.12.2011 passed u/s 143(3) of the 1961 Act. There are common issues involved in these appeals and hence these two appeals were heard together and disposed of by this common order. These two appeals are filed late by 4 days and an petition is filed by assessee company explaining the reasons for delay in filing these appeal late by 4 days duly supported by an affidavit executed by Managing Director of the assessee company. The learned DR did not raise any serious opposition to the condonation of delay in filing this appeal late by 4 days. After considering the contentions made before us, we are condoning the delay of four days in filing this appeal late beyond time stipulated under the Income-tax Act, 1961 and admit both these appeals to be adjudicated on merits in accordance with law. 2. The grounds of appeal raised by assessee in memo of appeal(s) filed with the Income-Tax Appellate Tribunal, Chennai (hereinafter called "the Tribunal") for ay: 2007-08 in ITA no. 1406/Chny/2015 and for ay: 2009-10 in ITA No. 1407/chny/2015 respectively, read as under:- "For AY 2007-08: 1. The order of the Commissioner of Income Tax (Appeals) d....
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....by the Indian Supreme Court rather than the judgments of the Foreign Courts that has come to a different conclusion. Likewise, the Commissioner of Income-tax (Appeals) prefers to rely upon the classification of software as intangible asset by the Institute of Chartered Accountants of India ignoring the judgment of the Supreme Court cited (supra). The judgment of the Supreme Court in the Appellants' own case also supports the case of the Appellant and has been distinguished for wholly unacceptable reasons. Interest 9. The Commissioner of Income Tax (Appeals) erred in confirming levying interest u/s 234B and 234D of the Act. The levies are arbitrary, high and liable to be cancelled. 10. Any other ground that may be raised at the time of personal hearing." For AY 2009-10: "General 1. The order of the Commissioner of Income Tax (Appeals) dated 23.03.2015, is arbitrary, erroneous, incorrect and contrary to law and facts. Depreciation on Digital Content 2. The Commissioner of Income-tax (Appeals) erred in confirming the order of the lower authority restricting the grant of depreciation to 25% instead of 60% as cl....
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....ute of Chartered Accountants of India ignoring the judgment of the Supreme Court cited (supra). The judgment of the Supreme Court in the Appellants' own case also supports the case of the Appellant and has been distinguished for wholly unacceptable reasons. Disallowance u/s 14A of the Income Tax Act 9. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of an amount of Rs. 57,49,365/- in terms of S.14A r.w.Rule 8D of the Income tax Rules. 10. The Commissioner of Income Tax (Appeals) ought to have noted that the provisions of Sec.14A would apply only in respect of exempt income in relation to which expenditure has been incurred and not to the present case where no expenditure has been incurred at all. 11. The Commissioner of Income Tax (Appeals) ought to have noted, the investments themselves have been occasioned pursuant to an order of the High Court sanctioning a scheme of merger. Hence, the disallowance of notional expenditure has no basis and is liable to be cancelled in full. Interest 12. The Commissioner of Income Tax (Appeals) erred in confirming levying interest u/s 234 B and 234 D of the Act....
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....by it and utilized for the purpose of production of films. The assessee submitted that it engages software programmers who write necessary code for the software which is later translated into machine readable form resulting in software that is stored in an information storage device like hard disk. The software relates to various visual effects that are utilized for making of films and it was submitted that this animation software constitutes stock in trade of the assessee which is exploited by it in production of business of animation films. The assessee relied upon Explanation-2 to Sec.10B of the Act, which defined computer software as under: " 10B......... Explanation 2 - For the purpose of this Section - (i) 'computer software' means - (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature as may be notified by the Board; which is transmitted or exported from India to any place outside India by any means; The assessee submitted that animation software developed by it satisfies the definition of computer so....
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....he nature of purchase, it forms part of the goodwill recognised at the date of the amalgamation. Some intangible assets may be contained in or on a physical substance such as a compact disk (in the case of computer software), legal documentation (in the case of a licence or patent) or film (in the case of motion pictures). The cost of the physical substance containing the intangible assets is usually not significant. Accordingly, the physical substance containing an intangible asset, though tangible in nature, is commonly treated as a part of the intangible asset contained in or on it. In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable. In determining whether such an asset should be treated under AS 10, accounting for fixed assets, or as an intangible asset under this standard, judgment is required to assess as to which element is predominant. For example, computer software for a computer controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as a fixed asset. The same applies to the operating system of a....
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....ch is developed in-house is used in the business of movie production. 14.4 From the submissions of the assessee, it is clear that it has utilized the software in the production of films but the same was developed by it as Digital content/ Animation software and still owned by it. 14.5 Let us now deal with the difference between the software Developed/acquired and copy of computer software purchased by it: In the case of the first one, the company holds the rights of the said software and sells or gives a copy of the same to its clients, which are separately considered in the trading account. However, the issue is how the same is to be treated in the hands of the assessee company. It is undoubtedly its intellectual property right having enduring benefit, as claimed by itself that it is eligible to use the animation in sequels, etc. For example, the animation on characters like 'Ganesa', Buddha created by the company can be used again and again in various projects. Though these items are in the form of developed software they are intangible assets of the company in the first place. Therefore, it is clear that the software has longer and enduring life period, whi....
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.... to intangible assets since the company holds intellectual property rights and exploits the same. 14.11 In view of the above, it is clear that the assessee company is eligible to claim depreciation @25% only on Digital contents developed by it as the same is held as intangible assets." 4. The assessee being aggrieved by an assessment framed by AO in second round of litigation vide assessment order dated 31.03.2013 passed u/s 143(3) read with Section 254 of the 1961 Act, filed first appeal before Ld.CIT(A). The learned CIT(A) was pleased to dismiss appeal filed by assessee, vide appellate order dated 23.03.2015 by holding as under: "6. The Decision: 6.1 The appellant raised the following grounds: "The Assessing Authority ought to have noted that the claim of the Appellant of depreciation at the rate of 60% is in line with Appendix I of the IT Rules that prescribes the said rate in relation to 'computer software'. The Assessing Authority ought to have noted that the content developed by the Appellant satisfies the definition of "computer software" as set out in the appendix and the Appellant is thus entitled to the rate of depre....
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....is transferred either as per the Copyright Act or even as per the U.S. Regulations on this subject. The ratio laid down by the Hon'ble Supreme Court in the case of TCS (2004) 271 ITR 401 (SC) holding that computer software put in a medium of disk would be goods may lead to the inference that purchase of such disk is acquiring a tangible asset. If the disk, tape or floppy or other electronic medium in which the software is stored is by itself goods, then the assessee acquires the same, acquires a tangible asset. Computer software has not been defined in the Act, but in Note 7 to Appendix I to the IT Rules, it has been explained to include computer program recorded on any disk, tape, perforated media or other information storage device. Therefore computer software in canned form is goods and a tangible asset by itself. These are covered in Note 7 to Appendix I to the IT Rules and eligible for depreciation @ 60%.' 6.4 Canned software contained in a medium are bought and sold. It is an article of value. It is sold in various forms like floppies, disks, CD-ROMs, punch cards, magnetic tapes, etc. A program containing instructions in computer language is subject-matter of a l....
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....al effects, based on which several animation films have been produced by it, some even nominated for the Oscar Awards. The computer animation and special effects in the form of computer software and are referred to as digital content, stored in the hard disc of the computer. 6.8 The expenditure incurred by the assessee on development of software is capital in nature. The assessee had not incurred expenditure towards any asset which is depreciable under the provisions of Income-tax Act. I place reliance on the decision in the case of Hylam Ltd. v. CIT [1973] 87 ITR 310 (AP) for the proposition that if the expenditure was incurred for initial outlay or acquiring or bringing into existence an asset of enduring nature: for the business of the assessee or for expansion of assessee's business or for substantial replacement, it will be treated capital expenditure. 6.9 Software: A computer software is a set of commands, on the basis of which the computer may be directed to perform the desired function. Software is a series of instructions. While it may be housed in a floppy disc or a CD-ROM or the hard disc of the computer, the item referred to as software is the seri....
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....nk obtained licenses to use four programs, that is, software, which instructed the bank's computer to perform deposit and lending functions and process general accounting. The information was contained, on magnetic tapes. The court stated that it would look to the "essence of the transaction" to determine whether the property purchased was tangible or intangible. The court held that, since the information on the tapes could have been communicated in several different ways., and the computer could even have been programmed over the telephone or by hand, the essence of the purchase was not the tapes, but the process which enabled the computer to function. The software was therefore in essence intangible property. In St Albans City and District Council v International Computers Ltd [1997 FSR 251] Sir lain Glidewell in deciding on whether programs were goods, commented on tangibility. He referred to the software or programs as "the intangible instructions or commands". 6.12 The courts have held that software is intrinsically incorporeal and that it is mere intangible "knowledge" which "rests in the machine. [District of Columbia v. Universal Computer Asso....
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....nt as well as sales and its exports - assessee was eligible for depreciation on intangible assets acquired by it. DCIT vs. NETVISIIN WEB TECHNOLOGIES LTD. (2013) 37 CCH 280 AhdTrib. iv. In the case of DCIT vs. HONDA SIEL CARS LTD.(2013) 21 ITR (Trib) 497 (Delhi) : (2013) 142 ITD 783 (Delhi), it is held: "8.1 The Special Bench farther observed that the rights which an assessee acquires by purchasing the disk or magnetic medium containing the computer software with limited or absolute right to use; the same by itself would satisfy the requirements of the Plant. The assessee's ownership of limited right over the tangible asset is to conclude that the assessee is the owner of the Plant. It was also observed that in the case of Maruti Udyog Ltd. v. Dy. CIT (2005) 92 ITD 119, Radha Krishna Foodland Ltd. ; Escorts Ltd. v. Asstt. CIT (2006) 8 SOT 167 and Hero Honda Motors Ltd., the conclusion that the expenditure on purchase of computer software was capital proceeded on the footing that the purchase was an outright purchase and that Software was an intangible asset." 6.15 A recent ruling in the case of Makemytrip (India) Pvt Ltd vs DCIT Circle [2012] 19 taxma....
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....in future, should be treated as intangible capital assets. In view of above reasonings judicial pronouncements, I held that this software which were developed by the assesse company are entitled for depreciation @ 25%. Hence, the assessment made by the AO in this respect is justified and accordingly, the grounds no. a,b,c,d,e & f set out in the grounds of appeal are dismissed. In the result, the appeal filed by the appellant is dismissed." 5. Aggrieved by an appellate order passed by learned CIT(A), the assessee has filed an appeal with tribunal. The learned counsel for the assessee submitted that the assessee is a software developer and the issue before the tribunal is whether the assessee is entitled for depreciation @ 25% or 60% on computer software. It was submitted that in first round matter went upto tribunal at the behest of Revenue and the tribunal was pleased to set aside the matter to file of the AO for fresh adjudication of the issue. It was submitted that in second round of litigation both the AO as well learned CIT(A) has decided the issue against the assessee. It was submitted that the assessee developed animation software. Our attention was dr....
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....o animation graphics and special effects, based on which several animation films have been produced by it, even some nominated for the Oscar Awards. The computer animation and special effects in the form of computer software are referred to as 'digital content', stored in the hard disc of the computer. Thus, the assessee is claiming that 'digital content' developed by it is essentially computer software in so far as it related to the computer program that has been recorded on a storage device such as a disc. The assessee has claimed that the content developed is utilized in the multimedia and entertainment industry and, by is very nature, is a series of software programme recorded on storage device. As per Rule 5 to Income-tax Rules, 1962, the depreciation in respect of block of assets shall be calculated at percentages specified in Appendix 1 to Income-tax Rules, 1962 on written down value of such block of assets as are used for purposes of the business or profession of the assessee at any time during the previous year. In Appendix 1 to Income-tax Rules, 1962 at Part A under clause III- Machinery and Plant at sub-clause 5, it is specified that Computers including computer software....
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....program which is recorded in any disc, tape, perforated media or other information storage device. Thus, as could be seen that the assesee has developed Digital Content which is held by assessee as an asset and is used in various films etc after being manipulated. This in our considered view cannot be equated with a computer program but what is held by assessee is a digital content which is used by assessee in various films etc.. The computer animation and special effects are digital content which are stored in the hard disc of the computer. This digital content developed by assessee is utilized in the multimedia and entertainment industry and at best it is a copyrighted intangible asset owned by assessee which is manipulated by assessee to be used in various films etc. but to contend that it is a computer software within the meaning of Appendix 1 will be far fetched as it is not a computer program. If the language in the statute is clear and unambiguous then strict interpretation has to be done and it is well settled that there is no equity in taxing statute. Once the definition is given in the statute itself, then there is no need to refer to other statute and restrictive defi....
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....re' as is referred to in Hon'ble Supreme Court judgment in assessee's own case was in context of Customs Laws which was very vide definition and hence we cannot draw analogy in the 1961 Act read with 1962 Rules. Thus, to say that digital contend developed by assessee can be equated with computer program is far fetched but rather it is a copyrighted material developed by assessee which is stored in computer. This digital content was manipulated by assessee to be used in different films but still it cannot be categorized t a higher pedestal of being termed as 'computer program' rather it still retains the character of copyrighted material being intangible asset and in our considered view, the assessee is eligible for depreciation @ 25% as these copyrighted material developed by assessee being 'Digital Content' which is used by the assessee in various films etc.. Thus, we concur with the view of learned CIT(A) who has passed well reasoned order which we affirm and dismiss the appeal of the assessee on this issue. Thus, ground number 2 to 8 stand dismissed. The ground number 1 and 10 are general in nature and does not require separate adjudication while ground number 9 is consequential....